Will ObamaCare’s Exchanges Encourage Health Insurers to Prioritize the Healthy and Slight the Sick?

ObamaCare creates a network of health insurance exchanges—state-run marketplaces through which individuals can purchase subsidized, regulated insurance. Today, the administration released a first draft of its proposed exchange rules.

In theory, the exchange requirements make possible some of the law’s sweetest benefits: Inside the exchanges, insurers are forced to sell policies to all comers, regardless of preexisting conditions, and are strictly limited in terms of how they can charge different prices based on health history.  

The problem with these regulations, essentially price controls, is that they they stack the financial incentives against the sick.  For insurers, the best way to increase their bottom lines is to cherry pick the healthiest—and thus the cheapest—individuals. Because insurers aren’t allowed to charge more to enroll those likely be sicker and more expensive to cover, they stand to make far more money if they successfully sign up and keep a larger pool of healthier individuals. The costly sick, meanwhile, become financial liabilities, and insurers inevitably end up working to encourage those individuals to change plans as soon as possible, perhaps by providing them with stingier benefits and poorer service.

This happens despite the fact that the rules are designed to facilitate equality amongst enrollees, regardless of health. But even within regulated environment that resemble the exchanges, insurer cherry picking is well documented. As John Goodman, president of the National Center for Policy Analysis, explained in his book Lives at Risk, plan providers operating under such rules offer benefits likely to attract healthy people, like sports club memberships, but avoid or dump services that will attract sick and expensive individuals.

Last year’s health care overhaul attempts to deal with the problem through a system known as risk adjustment—a system of forced financial transfers from plans that enroll more health individuals to plans that enroll more of the sick. The idea is to smooth over the incentives to cherry. As Bloomberg reports, today’s proposed exchange regs lay out the risk adjustment guidelines:

The rules create a “risk-adjustment” program that would take money from insurers in a state with low-cost patients and give it to plans whose customers run up the highest bills. The policy applies both to insurers selling coverage within the exchanges and those operating independently.

“The risk-adjustment program serves to level the playing field, both inside and outside of the exchange,” the government said in a description.

The problem is that there’s quite a bit of evidence that risk adjustment doesn’t work. Not only does it fail to put a stop to cherry picking, it can actually end up making things more expensive overall.  

In a 2010 working paper, a quartet of authors from Stanford, Princeton, the U.S. Treasury, and the University of Maryland took a look at risk adjustment in within Medicare Advantage, which offers seniors a selection of regulated private plan alternatives to fee-for-service Medicare. In 2004, Medicare advantage began using a risk adjustment model in hopes of reducing cherry picking. It didn’t work. “Our research finds that favorable selection, and consequently overpayments, have not fallen appreciably since the introduction of the most comprehensive model of risk adjustment in 2004,” the paper concludes. 

Noting that last year’s health care overhaul calls for a similar sort of risk adjustment amongst the private insurers operating through the exchanges, the authors write that “in light of the results presented here, one question is how well a risk adjustment mechanism will reduce adverse selection in the exchanges.” Indeed, risk-adjustment may be even more difficult within the exchanges. “A comparable data source does not exist for the commercial market,” they write, “which leads to the question of how risk adjustment will be implemented, and whether one can reasonably expect it to perform near the level of Medicare’s model.” In a related publication for the National Bureau of Economic Research, meanwhile, the same group of authors note that another side effect of risk adjustment was actually to make Medicare more expensive overall. 

The comparison between Medicare Advantage and the exchanges isn’t perfect. Within the Medicare Advantage program, insurer cherry picking leads to sicker enrollees ending up on traditional Medicare. No such option will exist within the exchanges. So if risk adjustment fails in the exchanges, what might happen? According to the authors of the paper, “possible alternatives are lower quality care across the exchange for high risk individuals as plans seek to avoid them, or perhaps the emergence of plans that do provide quality care to high risk individuals but at higher premiums that incorporate the increased risk that risk adjustment misses.” Given the choice, higher premiums and better service seem like the better outcome, but with the insurance regulations and the law’s rate review requirement, it’s not clear how much pricing leeway insurers will have—which may mean that lower quality is the only remaining option. 

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  • ||

    As RC Dean says, they are not "unintended" consequences if you know they are going to occur and do something anyway. The whole point is to screw sick people and let government determine who lives and who dies. The power over life and death is the holy grail for these fuckwads.

  • ||

    Oh my righteous god, this obuwamba and his death panels are gonna kill everyone in this country with this kind of sick shit legislation. I don't want no stinkin government union lackey tell me how they are gonna deny me healthcare. This country was founded on privitization and it is the healthcare insurance companies that truely know anything about healthcare, it's what they do. Every day they look for ways to make us healthier, take responsability (something we lost) and would never put profit before service. I think the lie-rebels don't understand how healthcare works. I say shift the burden for the job creators and give people the choice to buy health insurance or not. this will lead to more jobs and mor epeople being able to afford first class healthcare. it's so damn simple anyone can figure this out.

  • sevo||

    Spoof or ignoramus? You decide.

  • ||

    Well Mr. Sevo, that sounds chinese to me and your probablly a communist supporter or some wall st exec that doesn't know crap about shit. I am just letting the people know how it truely is.

  • sevo||

    Spoof or ignoramus? You decide.

  • ||

    Right on dude bro, shit's all fucked up. like healthcare bullshit is fucking whack and you talkin like a fag

  • ||

    I think huffpost or iglesias sent some minions over to troll reason.

  • Ken||

    Yes, that's it. The whole goal of ObamaCare is to "screw the sick people and let the government determine who lives and who dies."

    When it was signed, in a bunker somewhere in Antarctica, an evil man stroked a white cat and started maniacally laughing: Finally, his evil plan to maximize human suffering could be realized.

    And all those moderate Democrats who supported it and lost elections because of it? Well, they might be out of a job, but they can sleep soundly at night knowing that finally, more people will die at the hands of the death panels.

    You have it exactly right.

  • ||

    See finally a true blooded American, It might not appear that these dems are outright that obvious but that is EXACTLY what they are doing to maintain voting power. They will kill us jus tin order to get reelected, it's something scary man.

  • Ken||

    Yes, they are going to kill us in order to get reelected. That's very plausible and not at all ridiculous.

    Of course the irony is that their evil plan to exterminate elderly Americans with death panels actually resulted in many of them being voted out of office.

    Still, it's part of some grand evil plot, I'm sure.

  • Hugh Akston||

    Photoshop fail: The emphasis in that pic should be on the word learn, not you'll.

  • Fist of Etiquette||

    Also, I don't think Obama served in uniform.

  • ||

    Shorter Peter:

    Top-down management of very large, complex systems doomed to failure.

    Government goes ahead anyway. Why? Because fuck you. And, Commerce Clause.

  • ||

    Employee's will come to realize soon after being offered the exchange health plans:
    1. The employer portion of the premium, which was paid with tax-deductible dollars will go away.
    2. The employee portion, that was possibly paid with pre-tax dollars if they had a Section 125 will go away.
    3. The premium they will pay with the health insurance exchange will be after-tax and possibly higher than what could be obtained outside of the exchange.
    In other words they will possibly forego buying health insurance and pay the fine, which will be substantially lower than paying for insurance premiums.
    4. When all of this happens then will get the public option that was excluded originally, but which all of the liberals wanted!! So they win.

  • ||

    You seem to be under the impression that liberals ever think about second-order effects. I have never observed this behavior in the wild.

  • Ken||

    I would think generally employees would look at the exchanges, see that the rates offered are higher than their employers' highly subsidized offerings, and just pass them up altogether.

    But you're right, maybe everyone will hop in the exchanges "just because." And then after they do that, they'll pay the fine rather than go back to the heavily subsidized employer plans.

    COME ON!

    The basic tenants of ObamaCare are pretty libertarian: There's a marketplace for people who don't receive coverage from their employers. The marketplace is regulated but open to all competition. Under our federal system, is run by the states.

    Since people without insurance externalize the costs associated with emergency care or only buying insurance when they get sick, they pay a fine to mitigate that externalization. (The alternative is to allow hospitals to refuse to perform emergency care and to allow insurers the right to refuse policies for the sick.)

    You can argue the finer points, but I'm not aware of any system that guarantees the availability of health care that could be any more market-based.

  • sevo||

    "The basic tenants of ObamaCare are pretty libertarian:"
    That's a laugh riot! I'll bet you got a million of 'em!

    "I'm not aware of any system that guarantees the availability of health care that could be any more market-based."
    I'm not aware of any (workable) system that guarantees the availability of food, either.

  • Ken||

    The comparison with food is nonsensical. There is no condition you can be born with or develop that renders you unable to purchase food. There are countless such conditions that render you unable to purchase health insurance.

    If you're going to make comparisons, make good ones.

    If a more libertarian or market-driven solution is out there, I'm all ears. Let's give it a simple test: Would a self-employed person who was recently diagnosed with cancer be able to obtain affordable health insurance under such a system?

    If the answer is yes, I'm all ears. Until then, ObamaCare is by far the least invasive universal health care system proposed to date.

  • sevo||

    "There is no condition you can be born with or develop that renders you unable to purchase food."
    Ken, to make it clear:
    You're full of shit.

  • flye||

    "Would a self-employed person who was recently diagnosed with cancer be able to obtain affordable health insurance under such a system?"

    No, because by definition you would no longer be selling insurance, since the risk is 100%.

    What you want is forced subsidy of health care for the uninsured. Which may or may not be a wise policy, but at least call it what it is.

  • ||

    It makes me so sad to read something so confused and ignorant. So many, many false consciousnesses involved in this post it's hard to know where to start.

  • Jim||

    I wish they'd quit beating around the bush and just outlaw profits, which is what liberals actually would prefer but won't come out and say.

    All of this crap is designed to coax certain money-losing behavior, which will never work because businesses aren't created in order to service people regardless of profitability.

    You cannot defeat the market. In the end, it will always...and I do mean always...win. So forget this pussy-footing around, and just freaking outlaw making money, which would solve all of these tickey-tack problems, and let the chips fall where they may.

  • Ken||

    Yes, that's it. Obama and the Democrats want to outlaw profits, but they don't want to do it outright, so they set up a bunch of rules that minimize insurer profits. It just so happens that such rules might help people get medical care, but that's just a cover for our true secret plot to overthrow capitalism.

    *rolls eyes*

  • ||

    "so they set up a bunch of rules that minimize insurer profits"

    Except for that part where they're forcing you to buy health insurance, which would increase the profit margin of all but the most incompetent insurance providers.

  • ||

    "so they set up a bunch of rules that minimize insurer profits"

    Except for that part where they're forcing you to buy health insurance, which would increase the profit margin of all but the most incompetent insurance providers.

  • Ken||

    Yes, so in light of that, how exactly is ObamaCare designed to minimize their profits?

  • sevo||

    "Yes, so in light of that, how exactly is ObamaCare designed to minimize their profits?"
    Does anyone want to spend the time explaining to Ken how Ken is full of shit?
    Or do we just presume that Ken is so full of shit, there is no reason to waste time doing so?
    I vote for the latter.

  • sevo||

    "Yes, so in light of that, how exactly is ObamaCare designed to minimize their profits?"
    Does anyone want to spend the time explaining to Ken how Ken is full of shit?
    Or do we just presume that Ken is so full of shit, there is no reason to waste time doing so?
    I vote for the latter.

  • ||

    I never claimed they did. You did.

  • Hans Gruber||

    You silly libertarians...always trying to dismantle my well-laid plans!

  • Simon Gruber||

    Hans, you dipshit, that was my line!

  • Fist of Etiquette||

    Yippee ki-yay, Mr. Falcon.

  • R||

    *expletive deleted* censors.

  • rather||

    Fat,drunk and stupid is no way to go thru life son

  • sevo||

    Cue Tony:
    "There's nothing wrong with it, it just needs a little tweaking".

  • ||

    and some more regulations... you know, to make sure (this time!) that everything goes to plan.

  • wef||

    Dorm room bullshit artist invents a better way to run the world.

    Power worshipping lewinsky press oohs and ahhhs.

    ho hum

  • Ken||

    So basically Reason is saying, "right now, insurers legally deny coverage to sick people. But ObamaCare is awful because it doesn't sufficiently safeguard against this practice."

    Unless I'm missing something, Reason's own argument seems to suggest that single-payer is the way to go. Or just let the sick die. That's always an option, I guess.

  • sevo||

    "Reason's own argument seems to suggest that single-payer is the way to go. Or just let the sick die."

    Yep, either we go Stalinist or people die in the streets!
    I think I've seen that 'argument' before.

  • Ken||

    A regulated marketplace where publicly traded corporations receive payment for goods and services and pass the profits on to their shareholders is to you, "Stalinist."

    Please, the comparisons with Stalinism wear pretty thin when they're absolutely stupid and totally indefensible by anyone who is marginally literate.

  • sevo||

    "A regulated marketplace where publicly traded corporations receive payment for goods and services and pass the profits on to their shareholders is to you, "Stalinist."
    Gee, Ken, you're really trying for stupid, aren't you?
    Let's see you're earlier claim, stupid:
    "Reason's own argument seems to suggest that single-payer is the way to go. Or just let the sick die."
    So, stupid Ken, yes, you fail.

  • ||

    No, Ken. What we have now is an already regulated health care industry. What Obamacare does is regulate it beyond ANYBODY'S fucking comprehension and dictate prices and services from private companies.

  • ||

    IOW, not all markets are free, so there's a legitimate understanding for Reason's bashing of this "market".

  • ||

    Actually the level of regulation oversight price-setting and manipulation that the government inflicts on the health care industry is about what the politburos were doing with industries under stalin. Very close.

  • ||

    Yes, people fucking die. I know it's scary, but it happens.

  • Ken||

    Or more to the point, people die of curable fucking easily-cured diseases.

  • sevo||

    "Or more to the point, people die of curable fucking easily-cured diseases."
    Yes, Ken, they do.

  • ||

    They sure do. They die of easily preventable diseases. So, why is that everybody else's problem again?

  • ||

    This could be ideal for someone who nobody wants to cover. It's an opportunity to get coverage subsidized by your fellow American. Learn more about it at "Penny Health" online

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